FinanceChapter14 – Flashcards with Answers
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1) In the business world we need to be able to measure ________ performance and predict ________ performance if we want to deliver positive results. A) past, future B) past, present C) present, future D) present, past
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A
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2) The financial statements of a company are the primary sources of information that enable us to communicate the financial results ________. A) of the company externally B) of the company internally C) to internal managers but not externally to the public D) of the company, both internally and externally
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D
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3) Which of the statements below is FALSE? A) Financial statements are a collection of historical and current activities of the company. B) The collection of value over time found in financial statements requires us to pay attention to how we construct financial ratios so as to glean information for analysis. C) All financial statements are constructed with the same accounting principles, so you can always compare different firms based solely on these statements. D) We want to analyze financial statements so as to compare different companies and their performance relative to our company.
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C
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4) Which of the statements below is FALSE? A) Financial statements are a collection of historical and current activities of the company. B) The collection of value over time found in financial statements requires us to pay attention to how we construct financial ratios so as to glean information for analysis. C) We want to analyze financial statements so as to compare different companies and their performance relative to our company. D) All of the above statements are TRUE.
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D
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5) An example of a financial statement is ________. A) the Income Statement B) the Sources and Uses of Cash C) the Statement of Financial Position (Balance Sheet) D) All of these
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D
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6) ________ is the listing of all assets and all claims against the assets of a company. A) The Balance Sheet or Statement of Financial Position B) Income Statement C) The Sources and Uses of Cash D) All of these
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A
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7) The term balance sheet is used because the following accounting identity must always hold: A) Assets = Liabilities - Owners' Equity. B) Assets = Liabilities + Owners' Equity. C) Liabilities = Assets + Owners' Equity. D) Owners' Equity = Liabilities + Assets.
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B
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8) Income statements are often prepared ________. A) monthly for external use and quarterly for internal reporting B) annually for internal use and quarterly for external reporting C) monthly for internal use and quarterly for external reporting D) monthly for internal use and annually for external reporting
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C
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9) Total liabilities are $100,000 and total owners' equity is $200,000. What are total assets? A) We need to know retained earnings before we can compute total assets. B) We need more information on current and long-term assets before we can compute total assets. C) $100,000 D) $300,000
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D
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10) Total current liabilities are $100,000 and total owners' equity is $2,000,000. What are total assets? A) We need to know retained earnings before we can compute total assets. B) We need more information on long-term liabilities before we can compute total assets. C) $2,000,000 D) $2,100,000
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B
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11) The revenue is $10,000, the cost of goods sold is $2,000, the selling, general and administrative expenses are $3,000, and depreciation is $1,000. What is the EBIT? A) -$1,000 B) $2,000 C) $3,000 D) $4,000
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D
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12) The revenue is $40,000, the cost of goods sold is $26,000, the selling, general and administrative expenses are $7,000, interest expense is $2,000, and depreciation is $3,000. What is the EBIT? A) $2,000 B) $4,000 C) $7,000 D) $14,000
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B
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13) EBIT is $10,000 and interest expense is $4,000. If the tax rate is 30%, what is the net income? A) $3,800 B) $4,200 C) $5,200 D) $8,400
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B
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14) Which of the following statements is true about benchmarking? A) It compares a company's current performance against its own previous performance. B) It compares a company's performance against that of its competitors. C) It provides a standard of comparison for financial measurement. D) All of the above statements are true about benchmarking.
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D
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15) In regards to trend analysis over time, which of the following statements is TRUE? A) We often look at the past five years of financial statements to establish trends and then predict future performance based on these trends. B) To look at trends over time requires that we examine a financial statement at one point in time. C) The net income last year was $20,000 and the past five years has shown an increase of 10% on average for each of these five years. The predicted net income for next year is still $20,000. D) It is better to predict future performance by basing it solely on net income than on all the individual accounts.
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A
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16) One way to measure a company's financial performance is to benchmark against that of its competition. Which of the below is NOT a problem a company faces when benchmarking this way? A) A problem arises when we use financial statements of different firms. B) Firms are of different sizes, and thus comparisons may be troubling C) We cannot restate common-size financial statements for different firms. D) All of these are problems.
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C
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17) Comparing two companies using ________ may point out differences in management styles. A) common-size financial statements B) sales growth C) historical share prices D) earnings per share
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A
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18) To convert a balance sheet into a common-size balance sheet statement, we restate all the numbers as percentages of ________. A) revenue B) total assets C) total owners' equity D) total liabilities
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B
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19) To convert an income statement into a common-size income statement, we restate all the numbers as percentages of ________. A) total revenues B) cost of goods sold C) net income D) total assets
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A
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1) From the financial statements, we can look at specific performance areas of a company by selecting key pieces of information and analyzing this information ________. A) at a point in time B) over a specific time horizon C) at a point in time or over a specific time horizon D) All of these
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D
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2) ________ can be helpful for managers to understand short-term cash obligations. A) Profitability ratios B) Asset management ratios C) Solvency ratios D) Liquidity ratios
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D
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3) Which of the following statements is TRUE? A) The current ratio is current assets divided by current liabilities. B) Total asset turnover is net income divided by total assets. C) The cash coverage ratio equals cash divided by current liabilities. D) The quick ratio equals current assets - current liabilities divided by current liabilities.
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A
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4) Which of the statements below is FALSE? A) The acid ratio test equals current assets minus inventories divided by current liabilities. B) Examples of liquidity ratios include the current ratio, the cash coverage ratio, and the quick ratio. C) The current ratio is current assets divided by current liabilities. D) Inventory turnover equals cost of goods sold divided by inventory.
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B
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5) Computing liquidity ratios is ________ but interpreting them is ________. A) complex, even more complex B) complex, more straightforward C) straightforward, more complex D) None of these
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C
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6) A current ratio greater than one can tell us that the company ________. A) should be able to cover the current liabilities B) should be able to keep away from short-term cash problems C) may have too much capital tied up in current assets D) All of these
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D
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7) Which of the statements below is FALSE? A) When the current ratio is greater than 1, we are also saying that net working capital is positive as current assets are greater than current liabilities. B) Financial leverage ratios deal with long-term solvency and the use of debt as a financing tool. C) The debt ratio is total assets minus total equity divided by equity. D) Times interest earned equals EBIT divided by interest expense.
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C
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8) Which of the statements below is FALSE? A) The cash coverage ratio is EBIT plus depreciation divided by interest expense. B) Times interest earned equals EBIT divided by interest expense. C) The times interest earned ratio tells us the number of times a company has resorted to debt financing over the year. D) The debt ratio basically tells us the amount in debt for every dollar of assets.
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C
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9) ________ help us analyze whether a company is moving toward financial stress or is using debt to benefit the company and ultimately, the owners of the company. A) Financial leverage ratios B) Asset management ratios C) Days' sales in inventory D) Total asset turnover
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A
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10) Debt is a good when ________. A) we pay for everything later, allowing more positive cash flow today B) we enjoy the benefits of acquiring an asset early but can still pay for it over time C) we borrow at low rates D) we use it very sparingly
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B
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11) Which of the statements below is TRUE? A) Inventory turnover is cost of goods sold divided by accounts receivables. B) Receivables turnover is accounts receivable divided by sales. C) Total asset turnover is profits divided by total assets. D) A higher inventory turnover ratio signifies that inventory is moving faster.
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D
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12) Profit margin is equal to ________. A) net income divided by total assets B) net income divided by total owners' equity C) net income divided by sales D) None of these
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C
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13) ________ is the percentage of sales dollars that reaches net income on the common-size statements. A) The return on assets B) The income margin C) The profit margin D) The return on equity
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C
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14) Earnings per share is the ________. A) price per share divided by the earnings per share B) net income divided by the number of outstanding shares C) market value per shares divided by the book value per share D) P/E ratio divided by the earnings growth rate times 100
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B
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15) ________ break(s) down the return-on-equity into three components. A) The DuPont Model B) Market value ratios C) Profitability ratios D) Asset management ratios
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A
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16) The DuPont Model measures ROE by multiplying ________. A) the current ratio x total asset turnover x the equity multiplier B) the profitability ratio x times interest earned x the equity multiplier C) the profitability ratio x total asset turnover x the equity multiplier D) the current ratio x times interest earned x the equity multiplier
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C
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17) Return on equity can increase as a result of an increase in which of the following ratios? A) Net income/ sales B) Sales/ total assets C) Total assets/ equity D) All of the above will have a positive influence on the ROE.
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D
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18) Orange Electronics Inc. has a profitability ratio of 0.14, an asset turnover ratio of 1.7, a debt to equity ratio of 0.60 and a total asset to equity ratio of 1.60. What is the firm's ROE? A) 14.28% B) 22.85% C) 38.08% D) 41.76%
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C
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1) Once financial statements are made public, the external analysis of the company begins by ________. A) financial analysts B) certified tax planners C) the advertising department D) All of these
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A
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2) Financial analysts provide recommendations to their clients about what company ________. A) to buy B) to invest in C) to sell or divest D) All of these
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D
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3) The debt-to-equity ratios for Firm 1, Firm 2, Firm 3, and Firm 4 are 0.2, 0.3, 0.35, and 0.4, respectively. The earnings per share for Firm 1, Firm 2, Firm 3, and Firm 4 are $4, $3, $2.5, and $2, respectively. Everything else equal, which firm is placing more burdens on its borrowing? A) Firm 1 B) Firm 2 C) Firm 3 D) Firm 4
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D
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4) The debt-to-equity ratios for Firm 1, Firm 2, Firm 3, and Firm 4 are 0.25, 0.35, 0.35, and 0.45, respectively. The earnings per share for Firm 1, Firm 2, Firm 3, and Firm 4 are $4.5, $3.5, $3, and $2.5, respectively. Generally speaking,which firm is placing fewer burdens on its borrowing? A) Firm 1 B) Firm 2 C) Firm 3 D) Firm 4
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A
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5) Financial ratios ________ industries. A) can vary across B) are unchanging across C) are homogeneous across D) are always different across
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A
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6) Because financial ratios can vary across industries, it is ________ these ratios by industry. A) not necessary to study B) unimportant to benchmark C) important to benchmark D) futile to examine
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C
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7) Which industry has the highest average industry debt-to-equity ratio? A) Oil and gas B) Airlines C) Auto D) Drugs
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A
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8) Which industry has the lowest average industry debt-to-equity ratio? A) Auto B) Retail C) Oil and gas D) Airlines
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A
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9) Industries operate differently in terms of ________. A) labor intensity B) cash management C) capital intensity D) All of these
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D
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10) Everything else equal, an industry with more leverage will have a ________. A) higher return on assets B) higher return on equity C) lower return on equity D) Both A & B
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B
